Corporate Finance Test with Answers - 1734 Words

Corporate Finance: An Introduction (Welch) Chapter 1 Introduction 1.1 The Goal of Finance: Relative Valuation 1) Which of the following statements is true? A) In finance, it is important to determine an asset s absolute value. B) The relative value of any asset is, at best, a lucky guess. C) The true value of an asset is unaffected by externalities such as interest rate levels, the state of the economy, etc. D) Valuation is not an exact science. Answer: D Diff: 1 Topic: Valuation 2) The law of one price stipulates that A) identical goods must be sold to all buyers at the same price; otherwise price discrimination occurs. B)†¦show more content†¦B) Although most projects involve both financial and non-financial costs and benefits, the non-financial items are typically minor and can be ignored when estimating a project s value. C) Opportunity costs--e.g., cash flows that would be generated by an alternative project--should be included in your cash flow analysis. D) Both B and C are false statements. Answer: B Diff: 1 Topic: Project cash flows 3) David owns the building out of which he operates a small graphic arts business. He has extra space available and is considering converting the extra space into a gourmet coffee shop that he would also run. A local businesswoman has offered to rent the extra space from him for her own needs. She has suggested she would be willing to pay $1,000 a month in rent. In estimating the cash flows associated with the gourmet coffee shop, David should A) include the $1,000 rent as a cash inflow. B) include the $1,000 rent as a cash outflow. C) ignore the $1,000 rent since it is a non-issue if David decides to undertake the coffee shop project. D) consider the $1,000 as an added benefit. Answer: B Diff: 2 Topic: Project cash flows 4) You own a firm if A) you own all the outstanding stock. B) you own all the outstanding bonds. C) you own all the outstanding stock and bonds. 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